Volcker rule not unraveling, but it is under pressure

Action taken this week by Wall Street regulators to tweak the newly-enacted Volcker rule on the issue of debt investments known as collateralized debt obligations, which came after fierce lobbying by members of Congress and a lawsuit from the banking industry, does not signal that the law is unraveling, experts said.

That could come with a decision on the next big looming issue, CLOs, or collateralized loan obligations.

“I don’t think [the law is unraveling]. However, if the regulators allow banks to invest in CDOs and CLOs more broadly, then we will definitely see a loosening of the rule,” says Tram Nguyen, formerly of the Securities and Exchange Commission and now a partner at the Washington law firm Stroock & Stroock & Lavan.

Banks are pressing regulators to clarify exemptions for CLOs. Experts said that U.S. banks currently invest almost $70 billion in these securities.

But no decision is expected in the short term.

In contrast, banks needed a quick answer on CDOs because of accounting rules and that sparked regulators to act. The issue on CLOs can drag on to the summer of 2015 if not longer, said Jaret Seiberg, an analyst at Guggenheim Securities’s Washington Research Group.

Seiberg said debt obligations have gotten unintentionally caught up in the Volcker rule’s web.

“The industry is rightly scratching its head why regulators try to capture instruments that encourage extension of credit,” he said.

Seiberg disagreed with Nguyen. He called the CLO issue “a side-show” and won’t be a sign that the Volcker rule is unraveling.